It wasn’t until the end of a letter responding to Sen. Elizabeth Warren’s request that the Federal Reserve pressure Wells Fargo, one of the nation’s largest lenders, to replace its chief executive officer that Chairman Jay Powell came to the point. Or, more precisely, sidestepped it.
Warren, a Massachusetts Democrat, had written to Powell in October urging the Fed not to lift a growth cap imposed after a series of scandals at the San Francisco bank until the board replaces Tim Sloan. The CEO was appointed to his current role after a settlement over the creation of more than 3 million phony accounts prompted the departure of his predecessor, John Stumpf, but his 30-year tenure at the lender includes a number of leadership positions.
While Sloan has said that background gives him the skills and institutional knowledge to fix the bank’s problems, Warren has repeatedly said it shows that he failed to prevent those problems and argued that he should be fired.
Powell, while characterizing the events at Wells Fargo as “outrageous,” declined to join the debate, deferring to the central bank’s board of governors, which oversees its regulatory actions.
“Your letter requests the board not remove the asset growth restriction until the current chief executive officer of Wells Fargo” is replaced, he wrote at the end of a Nov. 28 letter obtained by the Washington Examiner. The missive outlined actions the Fed has taken so far, including its order barring the bank from expanding total assets beyond the nearly $2 trillion held at the end of last year.
“The decision about terminating the asset growth restriction will be made by a vote of the board,” he added. “The Federal Reserve is actively engaged in reviewing Wells Fargo’s progress in meeting the requirements of the order and in ensuring that the firm comprehensively address the deficiencies identified.”
Wells Fargo declined to comment on Powell’s letter. Sloan has previously told Wells Fargo investors that his team is working closely with the Fed to address its regulatory issues while maintaining that the central bank’s action hasn’t hurt its day-to-day operations or hindered its strategic goals.
“We’re continuing to innovate,” the CEO said during a financial services conference in New York last week. “We’re continuing to invest. We’re continuing to hire really high quality people. So, so far, so good.”
The CEO had previously suggested Wells Fargo would be able to satisfy the Fed’s conditions by next year, though analysts say the Democratic Party’s takeover of the House of Representatives may complicate that timeline.
Rep. Maxine Waters, the Democratic California lawmaker positioned to become the next chair of the chamber’s Financial Services Committee, has already said she wants to strengthen oversight of the bank, which has been working to win back customer trust after bruising government settlements related not only to the phony accounts but problems in its mortgage- and auto-lending businesses.
Just a day after the November midterm elections, the lender disclosed that the number of customers whose homes were repossessed after erroneous calculations to determine whether they qualified for federally required relief programs was 36 percent higher than it told investors earlier this year.
Wells Fargo said at the end of June it had set aside $8 million to help the borrowers involved. A total of 870 customers were denied modifications, Wells Fargo said, though hundreds were ultimately able to keep their homes.
Executives still expect the Fed’s cap to remain in place through the first part of next year, Sloan said last week, without elaborating on the timing. Powell didn’t provide specifics either, though he stressed that effective correction of Wells Fargo’s issues are a “high supervisory priority” for the Fed.
“We do not intend to lift the asset cap until remedies to these issues have been adopted and implemented to our satisfaction,” he wrote. “What happened at Wells Fargo was outrageous. The underlying problem at the firm was a strategy that prioritized growth without ensuring that risks were managed, and as a result, the firm harmed many of its customers.”
Since the order was imposed, the bank has agreed to pay $1 billion in civil penalties to settle government claims it sold some auto borrowers insurance they didn’t need under the pretense they might not qualify for their loans otherwise, and charged fees to mortgage customers that it was supposed to be absorbing.
In August, Wells Fargo said it would pay $2.09 billion to settle Justice Department allegations that the bank packaged mortgages that were higher risk than they appeared into securities sold before the 2008 financial crisis. Bank officials were aware that the borrowers had misstated their incomes, the department said, which would impede their ability to repay the loans.
Such securities, which had been awarded the highest credit ratings and were widely held by investors including large Wall Street firms, became impossible to value after a housing bubble began to collapse in 2006 and home owners defaulted on their debt.
Cascading losses in the $15 trillion mortgage market, the largest in the U.S., ultimately spurred the collapse of investment bank Lehman Brothers and forced the government to spend billions on bailouts to shore up the financial system.
Wells Fargo tumbled 2.9 percent to $48.80 in New York trading on Monday. The shares have fallen 17 percent in the past year.
